Professional investors look to buy as markets tank

Not since the financial crisis in 2008 has the Dow Jones industrial average fallen so far, so quickly. Yet for professional investors on Wall Street, the fears that have buckled financial markets over the last week are creating opportunities.

Some are buying US stocks at levels they consider a steal. Some are looking at municipal bonds that can weather the current turmoil and will likely pay handsome yields.

Nearly all agree that what's behind the now seemingly daily 400 point-drops in the Dow is growing concern that the global economy will not get better any time soon.

Many may have expected ratings agency Standard and Poor's decision late Friday to downgrade US debt down one notch from top rating AAA for the first time in history. The move nonetheless compounded the market's anxiety.

On Monday, the Dow the shed 634.76 points, or 5.6 per cent, its sixth-largest point loss on record.

Bill Miller, a legendary investor at Legg Mason Capital Management, called S&P's downgrade "wrong and dangerous" in a note to clients. He said it appeared that S&P demonstrated a "stunning ignorance and complete disregard for the potential consequences of its actions on a fragile global financial system."

Panic is in the air again on Wall Street. That has some thinking of what to buy next, and when.

Kathy Jones, who heads fixed-income strategy at broker Charles Schwab, said she thinks that the S&P downgrade will lead to opportunities in the municipal bond market.

"The cascade effect" of downgrades will likely mean that some safe municipal bonds pay an abnormally high yield, she said.

It's clear that Wall Street thinks that the not-so-long-ago calm days of the market are over. As recently as July 21, the Dow was up to 12,571. That capped a nearly one-year period in which the benchmark Standard and Poor's 500 index rose 23 per cent, boosted by rising corporate earnings and a bond-buying stimulus program by the Federal Reserve that lifted the prices of commodities and riskier stocks. The Dow closed Monday at 10,809.85.

Goddard thinks that the stock of blue-chip, dividend-paying stocks will outperform the rest of the market over the next five years because the stock market's price to earnings ratio will stay below 13. That's a measure of how much investors are willing to pay for a dollar in a company's earnings.

"We are buying into weakness," he said.

Dimitre Genov, a senior portfolio manager with Artio Global Investors, a firm with $US47 billion in assets under management, has been buying so-called defensive stocks

Genov is picking up health care stocks, which have fallen 11 per cent over the last week. He's attracted by dividends that are greater than the 2.34 per cent an investor will receive from a 10-year Treasury note.

He thinks that a new bear market – a 20 per cent drop from the stock market's previous high – is a real possibility.